July 14, 2011
By St. Clair Newbern IV
While end-users reap the benefits of lower cost services and more powerful technology, telecom agents are seeing shrinking revenues. This has led some to consider the deregulated energy market as a way to replace lost telecom revenue. Electricity, natural gas and energy consulting services can provide an opportunity for channels to leverage existing relationships in building a secondary residual revenue stream.
However, finding the right energy supplier is critical to success in the energy market. There are basically two groups of suppliers:
Retail energy providers (REPs) literally take title to energy, then structure products that can be sold at the retail level. These entities may own generation, or natural gas supply, or they may buy some or all of their supply via the wholesale power market through one of many exchanges such as the NYMEX. These are the entities that create the energy products you will market to your clients.
Aggregators, brokers and consultants (ABCs) are similar to telecom agents in that each ABC may have relationships to sell the services of any number of REPs. By definition, aggregators are entities that assemble independent residential or business customers into buying pools with the goal of achieving overall lower rates than these buyers would get on their own. Brokers connect buyers and sellers. Consultants offer any number of services that go above and beyond simple aggregation or brokerage services. In practice, most firms fill a combination of these roles. For most telecom agents, partnering with an established ABC is the best route. There certainly is nothing stopping you from becoming an ABC yourself; however, you will find that in order to obtain the proper licensing, certification and establish supply relationships with top REPs, you must have verifiable industry experience, deep market knowledge, financial strength and technical abilities that take years to acquire. So, for most new entrants the smartest strategy is to find an ABC that will provide an immediate opportunity to leverage customer relationships and begin to building a new revenue stream.
The following primer will help assist telecom channel partners in choosing an ABC partner. The myriad firms offer drastically different services and have varied skill sets, philosophies, relationships and tools. As in any industry, there are firms that do not operate above board or are on shaky financial ground. It is important that you learn how to differentiate the good from the bad. It will allow you to preserve your reputation and, more importantly, allow you to build a solid book of business that you can count on for many years.
When evaluating possible partnerships there a number of questions that you should be asking:
1. Who are the companys principals? It is important to know the principals operating an ABC, so that you can determine their skills, strengths, business philosophy, etc. Also, be sure to find out it any of the principals have been fined or banned from doing business by any energy regulatory authorities. A principals past infractions can have a negative impact on the firms ability to work with the best REPs and may prevent them from operating in certain markets.
2. What is the companys experience level? This is one of the most important differentiators in choosing a partner. Simply being able to gather quotes is not sufficient in terms of experience, nor is it sufficient in terms of value to your customers. You should look for companies that have:
Management with at least two to five years of energy brokerage experience
A thorough understanding of unique market protocols, switching rules, disclosure rules and customer protection rules
An experienced legal resource, whether it is in-house counsel or a third-party law firm, that understands the intricacies of energy contracts
A pricing expert who has solid relationships with the personnel running REP pricing operations so that they are able to get rapid turnaround
A marketing expert who can articulate their overall marketing strategy, process and unique value proposition as a company
3. What markets are they active in? An ABC often starts out by focusing on their local market, then branches out across the country into markets where they see opportunity. If you have a large book of business in a specific area of the country, then you want to make sure to partner with a firm that is established as a reputable firm with the right relationships in that market. Simply ask for a list of markets where they are active and licensed. You also will need to verify that any ABC you might consider working with has the proper licensing required by the state public utilities commission (PUC). A quick Google search should get you the information you need for each market.
4. What suppliers does the company have agreements with? REPs have become very strict about with whom they will do business. Relationships with the top suppliers (e.g., Constellation New Energy, TXU Energy, etc.) are crucial if you are going to be able to win business. Thats because large players have the financial stability to honor contracts no matter how the market performs, while small payers may be crushed in volatile markets. That being said, there are some niche REPs that are a great fit for certain businesses. For example you will find REPs that are very competitive on residential and small commercial but dont compete well on larger accounts and vice versa. You will also find that some suppliers can be much more flexible on credit than others. You will need to have enough options so that you can find an appropriate supplier for each customer type that you are pursuing.
5. Who does the ABC truly represent? The issue of who an ABC represents became a big issue in the insurance industry and led many REPs to modify their contracts so ABCs had to clarify in writing whether they were a buyers representative or a marketing agent for the REP. Although there are no laws addressing this, it is important to understand that this issue persists and is debated to this day, and you should be careful not to misrepresent the nature of the relationship you are proposing. If you are not truly operating as an objective, unbiased resource on behalf of the client, take care not to imply that you are.
Certain ABCs strategies are to sell the longest term contract at the highest margin they possibly can and direct all their business to suppliers that pay upfront. They are working for themselves or as a marketing arm of select REPs that meet their payment criteria. While this is legal and may appeal to those seeking fast payouts, it has lead to many ABC failures over the years. Heres why: A company like this is operating month to month, burning through its cash by paying upfront commissions and salaries to its principals. If it gets hit with a large chargeback because a customer defaults, it either has to come up with the money out of pocket or fold up shop. In the latter case, you, the agent, will no longer be paid on accounts you signed.
The alternative strategy is to act as the buyers representative. This means that you recommend short-term energy contracts when that is in their best interests. It also means that you let payment terms influence your decision on which REPs to invite to bid. Instead, invite the best suppliers to meet the buyers needs. We have found this strategy allows you to keep your clients for many years and many renewals.
6. What technology platform does the company use? In order to effectively manage a growing portfolio of energy customers and their contracts, you must have a platform that enables you to track your deal flow and your earnings. You want to work with a firm that has the ability to automatically import monthly usage data, calculate your commissions and provide you a detailed accounting of your projected cash flow each month. You also want a good customer relationship management tool to track your activity and protect your prospects.
7. What back-office support does the company provide? One of the key benefits of working with an ABC is back-office support so that you can focus on selling while its staff focuses on providing sales support, generating pricing proposals, handling contract negotiations, conducting presentations for your prospects, providing bill auditing and all the tasks that you do not have the experience to do. If youre splitting the revenue, this is what you are paying for and should expect.
8. What is the companys marketing strategy? Good ABCs will be able to clearly articulate their marketing strategy. For example, some ABCs focus on signing smaller customers using field sales while others may focus on phone and Internet sales. If the company executives cannot tell you their marketing strategy, then they dont have one, so youll have to figure it out on your own. If you are a master marketer then you may not need to follow the ABCs plan, but you can build business much faster if you can execute a marketing strategy that has been proven to work over time.
9. What is the companys target client demographic? Often ABCs will focus on a specific vertical market, such as small mom and pop businesses or larger commercial and industrial clients. Make sure the firm you partner with has the experience and focus that will allow you to target the types of clients you want. Discussing the type of accounts you typically call on and verifying that the ABC offers solutions for that class of customer will ensure that you can meet the needs of your typical customer profile.
10. What is the companys financial health? You should ask the ABC what its cash position is, how much debt it is carrying and who its investors are, if any. The best answers are that it has no debt and a strong positive cash flow for many years into the future. The bottom line is that you want to make sure that any ABC you consider partnering with is not one bad month away from failure. There are plenty of very healthy ABCs that should be able to validate their financial status.
11. What is the companys culture and operations model? This may seem obvious, but it is very important to talk to the CEO or president and get a good sense of the company culture and how the firm operates. Will you be expected to participate in daily or weekly meetings? How involved will management to be in your day-to-day efforts? Will there be ongoing training to keep you apprised of market changes? What about training for industry certifications? What are the back-office operational procedures related to pricing and bid preparation? Are they laid back, leaving you to work as you see fit, or are they running a boiler room style operation, employing high-pressure sales tactics? Based on the answers to these questions, do you see your self fitting in well?
St. Clair Newbern IV is president of Live Energy Inc., an energy brokerage based in Colleyville, Texas. He has owned and operated the company for more than 10 years. He is a founding member, past president and current board member of the Texas Electricity Professionals Association (TEPA). He can be reached at
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